We have told readers many times that ratios should not be a primary indicator and should certainly not lead any investment. There are some exceptions, and one of them is the value stocks to growth stocks ratio. Again, this ratio should not be read in isolation, but, interestingly, is gets confirmed by other indicators.
We flashed a buy signal for value stocks when, last year, the value stocks to growth stocks ratio made a sharp U-turn, as documented in Market Sector Rotation Ongoing: Focus On Value vs Growth Stocks For Profits.
Since January this year, the ratio started to come down, suggesting that technology stocks would outperform. That trend continued until June of this year.
Right now, technology starts underperforming, and we wrote last week that it becomes nasty in technology land. One of the segments with many high flyers, the semiconductor stocks, shows signs of a potential breakdown. That is bearish for technology but also for broad markets.
Moreover, rates started rising again, and that is good for financial stocks.
As a reminder for readers that did not read our previous posts: value stocks are primarily financial stocks (banking stocks, insurances, etc), energy stocks (which we are not a fan of) and industrial stocks.
We believe, short term, financial stocks offer great value. Mid-term, we are slightly concerned that volatility will pick up as of summer 2017. The interesting thing to watch is, as a retracement would take place, how strong financials will be. If they will stand strong, they should be considered as the retracement runs its course … as they are more likely to offer value after the correction.